Dedicated Revenue Mechanisms for Freight Transportation Investment (2012)

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19 Concept The federal fuel taxes are the “base case” against which other revenue generation mechanisms are commonly compared, and a fuel tax increase or surcharge is a major freight infrastructure funding option. At present, approximately $34 billion is being raised annually through federal fuel taxes. The current federal tax rates are shown in Table 4. While the taxes on gasoline and diesel fuel are familiar to motorists and truckers, all other sig- nificant motor fuels are also taxed at varying rates. There were an estimated 7 million Class 4–8 trucks with freight body types that used about 20 million gallons of diesel fuel and 9 million gallons of gasoline in 2008. That fuel use would have generated about $6.5 billion in gross federal fuel tax revenue. While it is conceivable that this amount or some annual portion could be set aside for freight infrastructure funding, such an option would bring no more revenue into the system and would not promote the objectives of this project. Taxes or fuel purchases have been the major source of federal highway funding for over 70 years. Federal taxes are currently levied on sales of diesel fuel, gasoline, and all alter- native fuels except hydrogen and electricity. Diesel fuel is the primary energy source for domestic freight transportation by road, rail, and water, so a higher tax on diesel fuel would be a logical candidate for a freight infrastructure revenue mechanism. A significant portion of medium-duty trucks use gasoline, however, and a greater disparity between diesel and gasoline taxes would likely encourage use of more gasoline- powered trucks. Moreover, national objectives for emissions reduction and energy self-sufficiency might be served by encouraging the use of alternative fuels such as ethanol or natural gas. These considerations suggest that analysis of fuel- based freight infrastructure revenue options should be com- prehensive rather than focusing exclusively on diesel. Fuel use is a good proxy for vehicle activity and varies inherently with vehicle weight and load. However, fuel tax revenue per vehicle mile will tend to decline with increased efficiency, presenting a dilemma since increased revenue and increased efficiency are both goals. Also, there are extensive exemptions to federal fuel taxes that must be factored into any evaluation. Finally, fuel taxes are currently based on gal- lons sold rather than on price and not indexed, nor have they been increased to maintain buying power since 1993. The revenue option considered in this chapter would most accurately be labeled a fuel tax surcharge, levied on some sub- set of the truck population. Which trucks should pay a fuel tax surcharge and how they should be identified are difficult ques- tions (these questions are discussed in detail in Appendix B). It is also possible to envision an overall fuel tax increase with some portion of the increased revenue set aside for freight infrastructure. This approach is supported by some industry associations, but does not meet the objective of a dedicated funding source since it would be subject to the same diversion and variability that adversely affects the current system. A fuel tax infrastructure fund is already in place for the U.S. inland waterway system. Tug and towboat operators on the inland system pay 20 cents per gallon of fuel (predomi- nantly diesel). The tax revenue goes to the Inland Water- ways Trust Fund and is intended to pay for half of federal waterway infrastructure projects (the other half typically being a local match). In 2010, Inland Waterways Trust Fund revenues were $73.9 million, equivalent to about 369 mil- lion gallons of fuel. Like the Highway Trust Fund, the Inland Waterways Trust Fund has not kept up with infrastructure needs. In early 2010, the Waterways Council worked with the U.S. Army Corps of Engineers to develop a proposal for a 6- to 9-cent increase in the inland waterways fuel tax. This proposal was documented in the Inland Marine Transpor- tation System Capital Projects Business Model Final Report (the “ITMS plan”) (Inland Marine Transportation Systems Capital Investment Strategy Team, April 2010). The Class I freight railroads reportedly used 3.9 billion gal- lons of diesel fuel in 2008. (Association of American Railroads, C h a p t e r 3 Fuel Tax Surcharge

20 2009), about 20% of that used by Class 4–8 diesel freight trucks. Some states levy fuel taxes on off-road users, specifi- cally railroads. The Alabama state tax has been the subject of major litigation. The most recent development occurred in March 2011, when the U.S. Supreme Court reversed a U.S. Court of Appeals in finding that a railroad could indeed bring suit to halt the Alabama state tax (CSX Transp., Inc. v. Ala. Dept of Revenue, No. 09-250, 2011 WL 588790, U.S. Feb 22, 2011). The court did not nullify the tax, and the issue will likely move to federal district court. Discussions to date of fuel tax increases, conversions, or improvements have not been focused on trucks or freight. The exception has been the Freight FOCUS Act of 2010, which proposed a $0.12 per gallon increase in the diesel fuel tax with income tax credits or refunds for exempt or non-freight uses. A number of modifications to the fuel tax have been suggested: • Increase the tax rate. Based on total highway capital pro- gram needs identified by FHWA and AASHTO, the fuel tax rates need to increase by about 100%. The increase could be implemented gradually, and a portion dedicated to freight infrastructure. • Index for inflation. Creating an automatic, inflation- based, adjustment mechanism would maintain the buy- ing power of the fuel tax. There are a number of proposals based on alternative indexes. • Index for average fuel economy. A proposed automatic adjust ment in the fuel tax based on average fuel economy would align the tax more closely with actual highway demand. • Convert to a BTU tax. One proposal would tax fuel based on its energy value. Depending on the rates charged, this would alter the present structure of gasoline, diesel, and special fuels taxes. • Reduce exemptions. Reducing or eliminating the exemp- tions for government agencies and schools would spread the true cost of road use more equitably among the users, increase incentives for wise use of energy, and reduce the need to raise fuel tax rates. Public agencies would have to make tax obligations up from other revenue sources, how ever, effectively transferring other tax revenues to highway use. • Reduce evasion. Increasing enforcement or other mea- sures to reduce evasion would increase the net yield from any tax system and reduce the need to increase rates. • Reduce diversion. Part of the fuel tax is dedicated to the Mass Transit Account, and some of the Highway Account is diverted to non-highway projects. Eliminating non-highway uses would recover more of the net revenue for highway projects or freight infrastructure, but the transit funds would have to be made up from other sources. Table 4. Federal highway user excise taxes and percentage allocation.

21 • Convert to a sales tax. AASHTO has proposed converting the fuel excise tax from a “unit tax” (per unit of sales) to an ad valorem tax (on the value of sale), which presumably would increase with the price of fuel and maintain buying power. Most of these proposals, however, are aimed at reforming the existing fuel tax system rather than at using dedicated fuel taxes to support freight infrastructure. Creating a dedi- cated fuel tax revenue stream for freight infrastructure would require increasing or surcharging fuel taxes for freight trucks, or for all medium and heavy trucks. Selectively raising the fuel tax to support highway infra- structure in general is a straightforward prospect. Raising the fuel tax to support just freight infrastructure, however, intro- duces two sets of complications: • There is not an easy, clear, or consistent definition of “freight” vehicles to which an increased fuel tax might apply. • While diesel is the predominant fuel for heavy-duty vehicles that haul freight, most diesel vehicles do not haul freight and some medium-duty freight vehicles use gasoline. Freight FOCUS Act of 2010 In an attempt to increase funding for freight-related high- way projects, the ATA worked with Rep. Richardson’s (D-CA) office to draft the Freight FOCUS Act of 2010, which was intro- duced in September 2010. The legislation would create a new trust fund, “The Goods Movement Trust Fund” to address critical freight transportation needs. The fund would be financed by a $0.12 per gallon increase in the diesel fuel tax that would be adjusted annually for infla- tion. Non-freight diesel fuel uses would be eligible for tax refunds or tax credits, just as non-road uses are eligible at present. In addition, a $3 billion annual contribution would be provided by the General Fund. Specific projects would be selected competitively and allocations for environmental and security projects would total 8%. The bill attempted to ensure that revenue would be distributed proportionally to each mode’s financial contribution to the program. In the bill as introduced, the tax would only apply to highway users, but could eventually include rail and waterway modes. As drafted, the Act would only apply to commercial trans- port of goods for a fee. For-hire motor carriers and owner- operators would pay the higher tax, private fleet operators would not. The disparity raises equity issues and the potential for market distortions similar to a waybill tax. The proposal attempts to ensure that revenue generated from a new tax on diesel fuel to be paid by commercial high- way users will be used for projects of importance to those users. It would also halt increasing diversions of the fuel tax. Diesel Fuel Tax with Non-Freight Refunds This option, as proposed in the Freight FOCUS Act of 2010 would target freight highway users through an increase in the diesel fuel tax coupled with annual tax refunds or tax credits for non-freight vehicles. This approach has the advantages of a very short implementation time and low collection and compliance costs. Freight vehicle operators would simply see a tax increase with no new record-keeping or filing require- ments. The tax itself would be collected through the existing system with no incremental cost. Although the Freight FOCUS Act refers generically to “refunds” for non-freight vehicles, what is truly envisioned are refunds for public agencies and tax credits for commer- cial firms (motor carriers or private fleets). Although many service fleet operators may not owe enough tax in a given year to use the credit, this problem is not inherent in the refund/ credit approach and could be remedied in revised legislation or tax rules. The use of tax credits or refunds for some vehicles opens up a potentially valuable policy option—variable tax rates. By varying the refund or credit, it would be possible to encour- age or discourage different vehicle and fuel combinations. For example: • Lower tax rates (higher refunds) for newer diesel engines with lower emissions. • Lower tax rates (higher refunds) to encourage the use of more efficient diesel engines in passenger vehicles and small trucks. Most industrial nations tax diesel fuel at lower rates than gasoline. The higher BTU content of diesel fuel and the greater fuel efficiency and durability of diesel engines reduce over- all fuel consumption. Lower diesel taxes thus promote fuel conservation and reduce the dependence of those nations on imported oil. As a consequence, diesel passenger cars and light trucks are far more prevalent in other nations. Diesel/Gas Tax with Non-Freight Refunds To cover all highway freight vehicles, or all medium- and heavy-duty trucks, it would be necessary to cover all fuel types, including gasoline, natural gas, ethanol, and so forth. Doing so would spread the tax burden more equitably across freight vehicles, but would dramatically expand the scope and costs of compliance. There are roughly 7 million medium- and heavy-duty vehicles with freight body types, but around 250 million U.S. vehicles overall. Over 240 million non-freight vehicles would then be eligible for tax refunds or credits. The

22 costs of compliance for tax refund approaches would entail record keeping and documentation of fuel purchased and federal tax paid, documentation of vehicle type (presumably from state vehicle registration), completion and filing of tax forms, and tax return auditing and enforcement. Record keeping could be greatly simplified for users of gasoline company credit cards or commercial fuel cards. Through straightforward accounting changes, those card systems should be able to provide customers with monthly and annual summaries of federal taxes paid. Users of cash, purchase orders, bulk fuel, or other credit cards would likely have a greater record-keeping burden. Diesel Fuel Tax with Vehicle ID A second major option for a freight-only fuel tax is an elec- tronic system to identify the vehicle at fueling locations. There are several technologies available, most relying on dedicated short-range communications or other wireless systems. Federal implementation costs would be substantial, as would collection and enforcement costs. At a marginal tax rate of $0.25 per gallon, a long-haul truck driver buying 200 gallons would have a $50 incentive to evade the higher tax rate. Diesel/Gas Tax with Vehicle ID Expanding a high-tech vehicle ID system to cover all fuel types while distinguishing freight from non-freight vehicles would increase implementation, collection, and compliance costs significantly, comparable to a distance/vehicle VMT fee. All U.S. vehicles would have to be equipped with tags to sig- nal the appropriate tax rate at fueling locations. In all of these fuel tax options, the incremental collection, implementation, and compliance costs are attributable to the need to distinguish freight from non-freight vehicles. This need would not exist if the fuel tax increase were universal and freight infrastructure funds were set aside by legislative choice or formula. Concept of Operations Current Collection Mechanism The federal fuel tax is very economical to collect. The tax is paid to the Internal Revenue Service (IRS) by the producer or importer of the fuel and passed along to the highway user who pays at the pump. The federal fuel tax is generally collected twice each month from “rack” locations—the point at which fuel leaves wholesale storage for delivery to retail outlets (see Figure 4). There are roughly 1,000 such locations. The annual collection cost for the federal fuel tax has been estimated at approximately 0.2% of revenue (American Transportation Research Institute, May 2007), determined by the research team to be roughly $70 million annually in 2010. Retail fuel purchasers are effectively reimbursing retailers and wholesalers for the taxes already paid. Bulk fuel purchas- ers pay taxes if not exempt. Exempt purchasers either buy bulk fuel, have credit cards that exempt them from taxes, or file for refunds with their income taxes. Credit card fees and other collection costs are absorbed by retailers and wholesalers. International Fuel Tax Agreement Trucks that operate and purchase fuel in more than one state are required to reconcile taxes paid and fleet VMT by state under the IFTA system. The system allows motor carriers to pay each state an amount based on the total miles oper- ated in that state. Carriers report gallons purchased, fuel tax paid, and miles operated in each state to the IFTA. The IFTA calculates the net amount owed by each carrier to each state. An annual or periodic statement reconciling fuel taxes owed could also be a means of collecting or adjusting a federal tax or surcharge. Tax Refund/Credit Systems Tax refund or credit systems for fuel tax surcharges, simi- lar to the system proposed in the Freight FOCUS Act of 2010, could be either low-tech or high-tech and could distinguish different types and classes of trucks. Low-Tech Approach A low-tech tax collection mechanism would use the cur- rent system (shown in Figure 4). The additional diesel or gas tax would be collected for all fuel delivered from whole- sale “rack” locations, and all customers would pay the same Figure 4. Fuel tax collection.

23 tax rate. Establishing eligibility for a refund or credit would depend on a system of vehicle type designations. Freight Class 4–8 or 7–8 Vehicles. Targeting a fuel tax surcharge on “freight” vehicles raises the definitional issues addressed in Appendix B. The most likely basis for distin- guishing freight vehicles appears to be body type—vehicles capable of hauling freight would be taxed, whether or not they actually hauled freight. Vehicle body type would have to be part of the vehicle registration information and linked to the vehicle identification number (VIN). Vehicle registration showing a non-freight body type would qualify the operator for a refund or credit. All Class 4–8 or 7–8 Vehicles. If the higher diesel or gas tax rate were applied to all Class 4–8 vehicles, then vehicle registration information showing a vehicle to be Class 1–3 would entitle the vehicle operator to a refund or credit. If the system taxed Class 7–8 vehicles only, then Class 1–6 vehicles would be exempt. This system would be relatively simple, but would place the record-keeping and tax-filing burden on those with the exemption. For a diesel-only tax, those diesel fuel customers that did not operate taxed vehicles, including owners of diesel Class 1–3 trucks and diesel automobiles, would have to file annual, quarterly, or periodic forms with the IRS to obtain a refund or credit. Similar forms are currently used by those who purchase taxed diesel fuel for off-road and non-vehicle uses and later seek refunds or credits: • IRS Form 4136—Credit for Federal Tax Paid on Fuels (annual). • IRS Form 720—Quarterly Federal Excise Tax Return (quarterly). • IRS Form 8849—Claim for Refund of Excise Taxes (periodic). Federal collection and enforcement costs would consist of incremental tax return processing, auditing, and follow-up costs. New forms and instructions would have to be created to implement non-freight refunds of increased diesel taxes, but the research team did not attempt to estimate the cost of doing so. Private-sector compliance costs would be borne by non- freight diesel fuel customers who would file for refunds. If the tax increase surcharge were expanded to include gasoline and alternative fuel trucks, the group of non-freight record keep- ers would expand to include all vehicle owners and operators. High-Tech Approach A high-tech approach would involve the use of wireless technology to identify the vehicle and the appropriate fuel tax rate at the point of purchase. A high-tech approach of this kind would be similar to gas station payment for VMT fees. In both cases, the gas station itself would have to be equipped with technology—for instance, RFID or DSRC—to identify vehicles and charge the appropriate tax rate. Tagging all diesel vehicles (or, for a diesel/gas option, all vehicles) would be very costly. For a fuel tax, it matters which vehicle is at which pump and buying which fuel. It might be necessary to employ a sys- tem similar to bulk systems that use a vehicle identity reader on the fuel nozzle itself. Revenues and Costs Rate Structure and Gross Revenue The amount and structure of a fuel tax surcharge depends on the revenue goal and the scope of its application. For a given revenue goal, wider application (e.g., to all Class 4–8 trucks versus just freight trucks) allows lower tax rates. For a given tax rate, wider application yields greater revenue. Table 5 illustrates this relationship using 2008 vehicle popu- lations estimated from 2002 Vehicle Inventory and Use Sur- vey (VIUS) data. There are multiple variations on fuel tax options and at least four ways each can be applied. The primary options in Table 5 are shaded in gray under the working assump- tion that the system will cover either all Class 4–8 freight vehicles, or Class 4–8 trucks of all types. The other option shown is for just Class 7–8, the heavy-duty trucks now cov- ered by the HVUT. The first option, a diesel fuel tax with non-freight refunds or credits, would apply to an estimated 4.9 million diesel gross vehicle weight (GVW) Class 4–8 vehicles with freight body types. Those trucks used about 19.9 billion gallons of diesel fuel in 2008, so a surcharge tax of $0.25 per gallon would be required to generate $5 billion in new annual gross tax revenue. The tax revenue received would be higher, cov- ering all non-exempt diesel fuel purchases, but the rest would be refunded. The federal government would benefit from the “float” between the time taxes were paid and when they were refunded. The federal government would also gain windfall income from anyone who failed to claim the refund. If the surcharge applied to just Class 7–8, the rate would have to be $0.33 per gallon to generate $5 billion. The second fuel tax option is a surcharge covering both diesel- and gasoline-powered freight trucks. Since this option would cover more vehicles, the rate could be lower—$0.17 per gallon for Class 4–8 trucks or $0.30 per gallon for Class 7–8 trucks only. The third option, a diesel fuel tax with vehicle identifi- cation at point of purchase, could be applied to all types of

Table 5. Fuel surcharge rate structure.

25 diesel trucks—service and mixed categories as well as freight body types. If applied to Class 4–8 freight types, this option would require a surcharge of $0.25 per gallon to reach $5 bil- lion, the same as the comparable tax refund option. If applied to all Class 4–8 diesel trucks, the rate would drop to $0.20 per gallon. If restricted to Class 7–8 trucks, the required sur- charge would be higher. The fourth fuel tax option, a diesel/gas tax with vehicle ID, could cover all Class 4–8 trucks regardless of fuel type and generate $5 billion in gross tax revenue at $0.14 per gallon. The surcharge would be correspondingly higher if the vehicle coverage were more restrictive. Table 5 also shows the gross revenue from applying a $0.25 per gallon surcharge to the 2008 truck population. Revenue would range from $3.8 billion to $9.2 billion. Collection and Enforcement Costs The research team developed a rough estimate of federal collection and enforcement costs for tax refund options by allowing an arbitrary $1.00 for the cost of processing annual tax refunds or credits for non-freight diesel or gas fuel pur- chasers. There were roughly 10 million U.S. diesel vehicles in 2008. Table 6 shows that there would be roughly 5 to 6 million vehicles eligible for refunds. The average collection cost per vehicle is calculated based on the number of Class 7–8 or 4–8 diesel freight vehicles, which constitutes less than half the total. A diesel/gas tax refund system could have high total and average collection costs due to the expense of handling the very large number of refunds. These hypothetical diesel/ gas options are thus unlikely to be cost-effective unless the refund handling cost is much less than the cost estimated above. These figures illustrate the difficulty of simultaneously covering all the freight trucks, both diesel and gas, while exempting all other vehicles. These cost estimates would rise to the extent that tax refunds were filed quarterly rather than annually. The collection cost estimates for the fuel tax options with vehicle ID are likewise somewhat arbitrary. The estimate of $10 per vehicle reflects a common rule of thumb used in VMT fee discussions. This estimate is in all likelihood too low for VMT systems but is used here to reflect the simpler ID system required to determine whether or not a given vehicle should pay the incremental tax. The research team located no actual estimates for this specific function. Costs for a vehicle ID system rise with the number of vehi- cles involved. The research team did not attempt to reflect scale economies since these costs would be driven by the number of vehicles to be equipped, the number of locations to be equipped and maintained, and the number of transac- tions handled. The collection cost estimates for fuel tax options do not include any incremental cost of tax collection itself since that would be accomplished under the existing fuel tax system at Table 6. Fuel tax surcharge collection and enforcement costs.

26 wholesale locations. Credit and fees would be absorbed by retailers as they are at present. Implementation and Compliance Costs Table 7 provides estimates of federal government and freight industry implementation costs for a fuel tax surcharge. Fuel taxes with tax refunds have no significant imple- mentation costs. Such costs as are incurred would encom- pass developing and disseminating regulations, forms, and so forth. There would be no implementation costs to the industry because the higher tax rate would be paid through the exist- ing fuel tax system. Federal implementation cost estimates for fuel taxes with vehicle ID are derived from the Oregon pilot project, which is one of the few sources for experience-based estimates. The Oregon estimates yield a national total of roughly $3 billion to equip 160,000+ gas stations or equivalent data exchange points. The diesel fuel tax with vehicle ID option assumes that half the locations would have to be equipped, while the diesel/gas option assumes the full number. As Table 7 shows, the estimates allow an average of $100 for an electronic vehicle ID system. This is a lower amount than that allowed for an on-board unit/electronic on-board recorder (OBU)/EOBR capable of two-way communication, data logging, and so forth. The estimates also assume that only the taxed vehicles would be equipped, which may be a conservative assumption. Both federal and industry implementation costs are con- verted to annual cost equivalents. The federal infrastructure is assumed to have a 10-year life and industry OBUs/EOBRs a 5-year life. Industry Compliance Costs The Table 8 estimates for industry compliance costs are rough because there is little, if any, objective data to support estimates. Compliance costs for diesel or diesel/gas fuel taxes with tax refunds for non-freight use would be incurred by the non-freight users, not by the trucking industry. Table 8 allows an average of $25 per vehicle to cover the cost of record keeping and filing for the refund. This estimate becomes very large for the diesel/gas option because it would include over 240 million non-freight vehicles. Net Revenue and Revenue Efficiency Table 9 provides estimates of net annual federal revenue ($5 billion less collection and annualized implementation costs) and annual industry cost ($5 billion plus annualized implementation and compliance costs). The table gives the annual total, the average per vehicle federal revenue and private-sector cost, and the ratio of net federal revenue to total private cost. While the ratio of net federal revenue to total private cost in Table 9 is only one measure of revenue efficiency, it is immediately apparent that some options are markedly more efficient than others. • The highest ratios are for the diesel fuel tax with tax refunds due to the absence of significant implementation costs. These options build on existing collection systems. • Options that rely heavily on technology, namely the fuel taxes with vehicle ID, have high implementation and col- lection costs that dilute their revenue-generating efficiency. • The lowest ratio is for the diesel/gas fuel tax with tax refunds since it would require the great majority of vehicle owners (about 240 million) to file for refunds. The other key statistic shown is the annual average cost per vehicle. The diesel fuel tax with non-freight refunds achieves part of its apparently high efficiency by placing a relatively heavy burden on relatively few trucks. The lowest average cost per truck is for the widest possible application of regis- tration fees, i.e., to all Class 4–8 trucks. Evasion and Enforcement There could be significant potential for evasion in a fuel tax surcharge system. Some potential issues are the following: • There may be no automatic link between the vehicle and the fuel purchased for the vehicle, creating an opportunity for those with both Class 1–3 and Class 4–8 vehicles (con- struction firms, for example) to credit more fuel use to the smaller, exempt trucks. • The higher taxes on diesel fuel could also create greater incentives to use untaxed off-road fuel, especially for bulk fuel purchasers. • If electronic tags identified freight vehicles that should pay higher taxes, there would be a strong incentive to remove or deactivate the tags to avoid taxes. • If the tags identified non-freight vehicles and exempted them from higher taxes, there would be a black market for exemption tags. In either high-tech or low-tech approaches, there would have to be mechanisms and processes for appeals and excep- tions where a freight type vehicle is used for non-freight pur- poses (e.g., a Class 6 diesel tractor being used to pull a luxury travel trailer). If the fuel tax surcharge applies only to freight vehicles there would be an incentive to deliberately misclassify vehicles,

Table 7. Fuel tax surcharge implementation cost estimates.

28 use “service” vehicles to haul freight, or otherwise circum- vent a freight designation. One obvious strategy would be to haul freight in trailers behind “service” vehicles. Behavior Incentives Fuel taxes provide behavioral incentives to minimize fos- sil fuel use and associated environmental impact. From an economist’s perspective, these excise taxes charge the fuel user for the externalities associated with fuel use. When sized properly in conjunction with state taxes, federal fuel taxes can provide meaningful incentives. The study team found rela- tively little literature on the behavioral impact of the current federal fuel taxes. It is not clear how effective federal fuel taxes are in affecting behavior or how high they would have to be raised to do so. In considering the behavioral issue, there are two parts to focus on—buying trucks and operating trucks. Buying Trucks Raising the price of fuel through a tax surcharge should encourage the development and purchase of more fuel- efficient vehicles. A 2010 study by the National Research Council’s Board on Energy and Environmental Systems and TRB documented several measures that could be taken to improve fuel economy in medium- and heavy-duty trucks and found that taxing fuels could provide superior incen- tives for improving fuel economy (Committee to Assess Fuel Economy Technologies for Medium- and Heavy-Duty Vehi- cles, 2010): Finding 7-2. Fuel taxes offer a transparent and efficient method for internalizing the potential societal costs of climate change and oil imports (e.g., energy security) and reducing fuel consumption in road transport. Fuel taxes operate to make fuel- saving technologies more attractive and provide incentives for saving fuel in operations, while involving fewer unintended con- sequences than standards. Recommendation 7-1. Although the committee recognizes the political difficulty associated with increasing fuel taxes, it strongly recommends that Congress consider fuel taxes as an alternative to mandating fuel-efficiency standards for medium- and heavy-duty trucks (p. 176). Unfortunately, the 2010 study does not provide guidance on the amount of tax necessary to create the desired incentives. The 2010 study and other observers comment on the more fuel-efficient vehicles used in other countries and the greater use of transit (Committee to Assess Fuel Economy Technolo- gies for Medium- and Heavy-Duty Vehicles, 2010, p. 176). The data in Table 10 suggest that part of the reason may be the much higher fuel taxes in other developed nations. Euro- pean drivers pay gasoline taxes at least 10 times those in the United States and diesel taxes that are 6 to 9 times higher. The European taxes are lower for diesel than for gasoline, accounting in part for the greater popularity of diesel as an automobile and light-truck fuel there. In those other developed countries, the tax usually accounts for more than half the cost of fuel, since the underlying untaxed fuel price is not much different than in the United States. A fuel tax of this magnitude is far beyond anything contemplated in any current proposal. Table 8. Industry compliance cost estimates.

Table 9. Fuel tax surcharge net revenue and efficiency.

30 Operating Trucks The current fuel tax is a small factor in the operating costs of medium- and heavy-duty trucks. The American Trans- portation Research Institute (2010) estimates that fuel taxes currently average $0.062 per mile, or 3.6% of an average operating cost of $1.73 per mile. The total U.S. diesel fuel tax average was reported by ATRI to be $0.522 per gallon in April of 2010, of which $0.244, or 47%, is the federal tax. The federal fuel tax would therefore be about $0.029 per mile, or 1.7% of average operating cost. A change in what is already such a small part of the total cost is unlikely to change opera- tions or driver behavior significantly. Moreover, the federal tax is far less than the day-to-day fluctuation in fuel prices, which are roughly 10 times as important to marginal operat- ing costs. Truck fleet operators already have strong incentives to minimize fuel use by minimizing mileage, and many do so aggressively. Most over-the-road truckload operators pay drivers by the authorized mile, typically defined as the minimum distance required to position the empty truck, obtain the load, and deliver the load. The driver is not compensated for any additional miles run and must obtain authorization for detours, stops for repairs, or other devia- tions. Less-than-truckload (LTL) firms operating under the Teamster Master Freight Agreement pay a combination of hours and miles, again strictly controlled. Tightly managed local and regional trucking operations, such as UPS and FedEx, employ highly sophisticated routing algorithms to minimize costs. Operators of small freight and service fleets may be less sophisticated, but are no less diligent in cost minimization. Raising the diesel tax alone or increasing the existing dis- parity between diesel and gasoline taxes could encourage fleet operators to substitute gasoline vehicles for diesel vehicles where there were long-term cost advantages. According to industry sources, the current rule of thumb is that the higher initial cost of a diesel engine is outweighed by its greater fuel economy and longer life for annual operation over 20,000 to 30,000 miles. The most recent VIUS data (from 2002) show that the share of gasoline trucks drops from about 45% of Class 4–5 medium-duty trucks to about 9% of heavy-duty Class 7–8 trucks. Class 6 can be considered the “battleground” for diesel and gasoline power, with about 58% diesel and 42% gasoline. Recent diesel engine cost increases due to stricter emissions regulations and slightly reduced fuel economy have increased industry interest in gasoline-powered trucks. Ford recently introduced a new gasoline-powered F-650 Class 6 truck model targeted at this market. The potential impact of gas-for-diesel substitution is estimated as part of the eco- nomic impact analysis. Implementation Implementation of an overall increase in the diesel or gas- oline fuel tax would not require changes to the regulations or collection system or introduce any industry compliance needs beyond paying higher taxes. Implementation of a selec- tive increase or surcharge, however, would be much more complex. Many of the implementation steps for a diesel fuel tax sur- charge with refunds or credits for non-freight use are spelled out in the Freight FOCUS Act of 2010. The Freight FOCUS Act would amend the Internal Revenue Code to increase the federal diesel fuel tax by $0.12 per gallon and link that rate to a cost of living adjustment. The Act would further amend the Internal Revenue Code to refund the extra diesel tax paid to fuel purchasers that do not pay income tax (e.g., public agen- cies and charitable organizations). The Act would provide income tax credits equal to taxes paid for non-freight pur- chasers who file income tax returns. The Freight FOCUS Act defines “freight” as “goods transported for a fee by a water, land, or air transportation mode.” That definition would appear to cover commercial for-hire transportation, but not private fleet operations. As noted in Appendix B, only about 24% of the medium- and heavy-duty truck fleet is owned by Table 10. Motor fuel tax rates for selected countries (USD/gallon, 2009).

31 motor carriers or owner-operators; so, as drafted, the Freight FOCUS Act would cover only a fraction of the trucks on the highway. Definition Development To apply a fuel tax surcharge to vehicles used in goods movement, a broader, yet unambiguous, definition would have to be developed. As noted in the discussion of com- mon issues, “freight” vehicles could be defined by body type or by industry, but neither approach yields a precise fit with goods movement. Moreover, service industry, con- struction, and utility vehicles of similar size have similar infrastructure requirements and would benefit from many “freight” projects such as truck climbing lanes or bypasses. It may therefore be both more practical and more equitable to apply a fuel tax surcharge to all medium- and heavy-duty trucks. Parallel considerations affect the choice between a diesel- only surcharge or a surcharge across all fuel types used by medium- and heavy-duty trucks. Given that a gas-powered truck and a diesel-powered truck of the same size have the same infrastructure needs and impacts, it would be more equitable to impose the same fuel tax surcharge on both fuel types. Yet this approach would apply the surcharge to all 250 million vehicles in the United States and require refunds or credits for over 240 million vehicles. The types of vehicles and types of fuel subject to a fuel tax surcharge would most likely be decided in legislation, while the precise definition of “freight” vehicles would more likely be decided in IRS rule making. While the process could be contentious, it could likely be completed within a year from the passage of legislation, permitting a short implementation timeline relative to technology-dependent options. Vehicle ID Technology The underlying technology required to identify vehicles for the purpose of fuel tax surcharges is already available in the form of RFID and DSRC systems. The implementation steps for a national vehicle ID system would include evalu- ation and certification of vehicle and fueling site hardware; development of communications software, protocols, and so forth; and a multiyear deployment schedule. Vehicle identification devices (e.g., active or passive tran- sponders), once specified, could be required equipment on new vehicles and retrofitted to existing vehicles. RFID and DSRC devices tend to be relatively low-powered and would not need to interface with complex vehicle electronic sys- tems. A typical approach would be to develop performance standards and test procedures and then certify devices from multiple manufacturers (much as was done with converters in the changeover from analog to digital television signals). Filling station devices would need to identify vehicles and impose fuel tax surcharges accordingly. At least one commer- cial system (Easy Fuel) uses vehicle ID devices located at the filling cap and on the fuel hose nozzle to verify the identity of the vehicle being filled. Many filling stations already have separate cash and credit card prices or separate self-service and full-service prices, so the point-of-sale systems in use can accommodate multiple pricing options. Development and certification of such systems would likely be a multiyear process. Deployment at 160,000+ fuel retailers would likewise take several years. The magnitude of the deployment task would be reduced substantially if only diesel fuel were taxed. Fuel tax exemptions for government non-profit and off- road vehicles are currently implemented either through bulk sale, special credit cards, or other non-technological means. Handling bulk fuel purchases for fleet operators such as utili- ties and telecommunications firms that do not haul freight would require some similar arrangement. Phase-In Table 11 displays the research team’s working assumptions regarding phase-in of fuel tax surcharge options. Options that used the existing collection system through tax refunds or credits are assumed to be implementable within a year of approval and generate full net federal revenue in the first year of application. There are no significant federal imple- mentation costs. Since many contract freight rates have fuel cost surcharge provisions, the research team assumed that trucking operators would be able to pass on 66% of the increased taxes to customers in the first year and 100% in the second year. Compliance costs are not covered by fuel tax surcharges and would take longer to be passed through to customers. The research team assumed that 33% would be passed through the first year, 66% the second year, and 100% the third year. The options with vehicle ID technology are assumed to require a 5-year implementation period during which the federal government would be incurring development and deployment costs, but would not be receiving revenue. The timing of the pass-through to customers is assumed to be the same as the tax refund option, but to start after the 5-year implementation period. Advantages A federal fuel tax surcharge would have significant advan- tages as a revenue mechanism: • A fuel tax is fair in that it is proportional with highway use and infrastructure impact. The tax burden would increase with both vehicle weight and miles traveled.

Table 11. Fuel tax surcharge implementation.

33 • A fuel tax creates a small incentive for fuel efficiency, and raising the tax would increase the incentive. Varying the tax rates on alternative fuels can encourage development of fossil fuel alternatives, which is consistent with current public policy objectives. • The LUST Fund provides a working example of a multi- modal excise tax on fuel. • The federal fuel tax is already in place and is very economi- cal to collect. • If implemented through tax refunds or credits, a fuel tax surcharge would not require any new technology and could be implemented relatively quickly. • The low cost of implementation and lack of technology requirements makes a fuel tax surcharge implemented through tax refunds or credits for non-freight users a revenue-efficient option. • The fuel tax system already covers all alternative motor fuels except electricity and hydrogen. If hydrogen becomes a transportation fuel in the coming decades, it can be included in the existing system. • The fuel tax system is compatible with state fuel taxes, and there is a reconciliation and allocation system (IFTA) in place. Disadvantages A fuel tax surcharge could have significant drawbacks, depending on how it is implemented: • A tax surcharge on “freight” only would raise equity and definitional issues between freight and service vehicles. • A diesel-only surcharge implemented via tax refunds or credits would raise equity issues and encourage greater use of gasoline-engine trucks. • A diesel and gasoline tax surcharge would affect all vehi- cles and require refunds or credits for some 240+ million vehicles each year. • A technology-based distinction between vehicles would require lengthy and costly technology development and deployment processes.